Pension Credit
Pension Credit¶
Pension Credit is the main means-tested benefit (outside of the State Pension) for individuals over State Pension Age (seniors cannot claim legacy benefits or Universal Credit). It has two main components:
Guarantee Credit: a benefit that increases a claimant’s income up to the ‘minimum guarantee’ income (causing a 100% marginal tax rate).
Savings Credit: a trapezoidal benefit that rewards income (created to alleviate part of the 100% marginal rate in Guarantee Credit).
The main legislation for Pension Credit is:
The State Pension Act 2002: sets out the structure of Pension Credit and some major rules.
The State Pension Regulations 2002: defines the specific rules (rates, income sources). This is amended each year in order to uprate the benefit payment levels with inflation.
You can see how these components interact below:
from openfisca_uk import IndividualSim
sim = IndividualSim()
sim.add_person(age=70)
sim.vary("pension_credit_income", min=0, max=12_500, step=1)
import plotly.express as px
import pandas as pd
df = pd.DataFrame(
{
"Assessed income": sim.calc("pension_credit_income")[0],
"Guarantee Credit": sim.calc("guarantee_credit")[0],
"Savings Credit": sim.calc("savings_credit")[0],
}
)
px.area(
df,
x="Assessed income",
y=[
"Guarantee Credit",
"Savings Credit",
],
).update_layout(
title="Pension Credit entitlement by income for a single pensioner",
yaxis_title="Pension Credit",
yaxis_tickformat=",",
yaxis_tickprefix="£",
xaxis_title="Pension credit assessed income",
xaxis_tickformat=",",
xaxis_tickprefix="£",
height=600,
width=800,
legend_title="",
).update_traces(
mode="none"
)
We can also visualise the marginal tax rate imposed by Pension Credit. Guarantee Credit has a single 100% marginal tax rate: every pound a pensioner gains in income, they lose from their Guarantee Credit entitlement. Savings Credit has a negative (-60%) MTR initially, rewarding each marginal pound with a 60p bonus. After the Minimum Guarantee is reached, this changes to a phase-out, withdrawing 40p for every additional pound of income. This results in the following marginal tax rate schedule: 100% up to the Savings Credit threshold, then 40% up to the Minimum Guarantee and continuing until Savings Credit is reduced to nil.
mtr_df = pd.DataFrame(
{
"Assessed income": sim.calc("pension_credit_income")[0],
"Guarantee Credit": -sim.deriv(
"guarantee_credit", wrt="pension_credit_income"
),
"Savings Credit": -sim.deriv(
"savings_credit", wrt="pension_credit_income"
),
"Pension Credit": -sim.deriv(
"pension_credit", wrt="pension_credit_income"
),
}
)
px.line(
mtr_df,
y=["Guarantee Credit", "Savings Credit", "Pension Credit"],
x="Assessed income",
).update_layout(
title="Marginal tax rate for Pension Credit for a single pensioner by income",
yaxis_tickformat=".0%",
xaxis_tickformat=",",
xaxis_tickprefix="£",
yaxis_title="Marginal tax rate",
height=600,
width=800,
legend_title="",
)